How to make Illinois into a clean-energy leader

Illinois is a big deal where power is concerned: of U.S. states, it’s the sixth largest consumer of electricity and the fourth largest producer. It has more nuclear power plants than any other state and is unusually dense with underutilized transmission lines, which are at a premium these days. It has a thriving wind power industry (though it is a sad 18th in installed solar capacity), and a bustling, green-minded metropolis in Chicago, which boasts nearly 80,000 green jobs.

So it’s too bad the Illinois power system makes the Talmud look like The Da Vinci Code. I’ve been talking to people about it for a week and I feel like my brain got mugged in a back alley.

Nonetheless! States are where it’s at, in terms of clean-energy policy, and significant things are going on in Illinois. I shall attempt to make sense of them for you.

Here’s the top line, for those of you with short attention spans: Illinois has a renewable energy standard (in dork-speak, known as a renewable portfolio standard, or RPS), which on its own is a good thing. It also has a law allowing communities to take responsibility for their own power supply, and a growing number of communities choosing to do so, which on its own is also a good thing. Unfortunately, because of poor design, the latter policy is on a collision course with the former. The answer? Fix the RPS.

This is your Illinois clean-energy bumper sticker: Fix the RPS!

On to the full story.

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Illinois has a deregulated power market, which means that the state’s two big utilities (Ameren and ComEd) are in charge of power distribution and billing, but they don’t own power plants or sell power. Power companies compete to provide power, in an open market. (At least that’s the theory. The reality is considerably messier. For example: ComEd’s parent company is Exelon, which does own power plants and sell power. Just not through ComEd.) Deregulation originally happened in 1997 and has had a rather checkered history in Illinois since.

Long story short, three important things happened toward the end of the 2000s.

Thing one: the creation of the IPA

In 2007, in response to a spike in power prices, the state created the Illinois Power Agency (IPA), which was charged with negotiating wholesale power contracts on behalf of Ameren and ComEd customers, insuring that they get “adequate, reliable, affordable, efficient, and environmentally sustainable electric service at the lowest total cost.” The IPA doesn’t generate or sell power, it just brokers contracts between power companies and the utilities.

The IPA couldn’t just step in and immediately negotiate new contracts from scratch. It had to take over the contracts that the utilities had already negotiated. Some of them were six-year contracts signed in 2007 … shortly before IPA took over, the recession hit, and power prices plunged. As older contracts have expired, IPA has negotiated new contracts and gotten lower power prices. But it is saddled with those expensive 2007 contracts until mid-2013.

That means IPA has been getting power for utility customers that’s considerably cheaper than what they were paying pre-IPA, but nonetheless considerably more expensive than what can be procured in today’s power market. This is a key fact that shapes the rest of the story.

Now, Illinois utility customers — individual, commercial, and industrial — don’t have to buy the IPA-brokered power. If they choose, they can procure their own power directly. And because IPA contracts were more expensive than the prevailing market price, especially early on, most customers could save money by doing so. In practice, procuring power directly proved too much of a hassle for most smaller customers. For large commercial and industrial customers, however, the hassle was worth it, and almost all of them eventually opted to procure their own power from Alternate Retail Electric Suppliers, or ARES.

So in 2010, about half the state’s power load (mostly residences and small commercial) was served by IPA and about half (mostly large commercial and industrial) was served by ARES.

Thing two: municipal aggregation

In 2009, the Illinois legislature passed a Community Choice Aggregation (CCA) law, which allowed for what’s called “municipal aggregation.” That means cities or counties can procure their own power directly from ARES, pooling the ratepayers in their jurisdiction into what is effectively one big customer. And in late 2010, a key follow-up order simplified billing and made municipal aggregation even easier.

So in 2011, if you were, say, a mayor or city council in one Chicago’s suburbs, you faced an extraordinarily tempting opportunity. You could bail on the IPA, procure your town’s power from other suppliers, and save your constituents tons of money on electricity bills — sometimes up to 30 or 40 percent at a stroke.

In fact, the savings were so substantial that several communities, like Oak Park and Elgin, opted to purchase 100 percent renewable energy (well, sort of — more on that in a second) and still saved a ton of money.

Not surprisingly, municipal aggregation proved popular. As of May 2012, over 250 Illinois communities had passed referendum measures enabling municipal aggregation. (Over 100 of them have opted for 100 percent renewables.) The share of the state’s power load served by IPA has fallen to about 30 percent.

And the list keeps growing: This November, over 220 communities have municipal aggregation measures on the ballot. Among them, most significatly, is Chicago, where the measure is supported by Mayor Rahm Emanuel (D).

If all these ballot measures pass, IPA will be left representing a mere 10 percent or so of the state’s power load. (That unlucky 10 percent is going to be stuck paying off those expensive contracts.)

Grassroots greens in Chicago are excited about the city controlling its own power supply. They are still riding high on the euphoria of a massive victory: A few months ago, after years and years of activist effort, the two dirtiest power plants in Chicago, the Fisk and Crawford coal-fired plants, finally shut down. Activists want to keep the momentum going, so the Chicago Clean Power Coalition, which spearheaded the Fisk/Crawford fight, is rallying behind municipal aggregation. They say it will give the city a chance to craft its own energy portfolio, with lots of energy and renewables.

I think these folks have their hearts in exactly the right place, but they are rallying just a touch prematurely. Lemme explain why.

A brief diversion to discuss RECS vs. PPAs

It’s important to note that the communities purchasing “100 percent renewable power” via municipal aggregation are actually buying renewable energy certificates, or RECs. When a renewable energy generator produces power, it can sell that power to the commercial grid in exchange for RECs, which can then be sold or traded on power markets. RECs are frequently purchased by utilities or businesses in order to comply with renewable mandates.

There’s a good bit of debate over the propriety and validity of RECs. However, even if one assumes that they do in fact reliably represent renewable energy, they don’t do much to stimulate demand for new renewables. They are mainly a revenue stream for existing renewable energy producers. And over time, most of the RECs being purchased by towns in Illinois have come from out-of-state energy producers, which does even less to stimulate demand for Illinois renewables.

Luring investments in new, in-state renewable energy installations requires a different instrument: power-purchase agreements, or PPAs. A PPA is a contract that commits a customer (or customers) to buying the power produced by a generator at a set price for a set period of time.

So, say Illinois was trying to persuade Vestas to invest in a new wind farm in Illinois. It could say, “lots of Illinois towns buy RECs, though the number of RECs they buy is constantly fluctuating depending on power prices, and we’re not sure how many towns will be doing it from year to year.” Would that give Vestas the confidence to invest tens of millions of dollars? Probably not. Instead, the state could sign a PPA with Vestas, promising to buy the power produced by the new farm at $40/megawatt for 20 years. That’s the kind of assured demand that might move Vestas to action. Think of RECs like one-night stands and PPAs like marriages.

Now, back to our story.

Thing three: the Illinois RPS

In 2007, Illinois established a (reasonably ambitious) renewable portfolio standard requiring that 25 percent of the state’s electricity come from clean sources by 2025. At the outset, the RPS only covered the power providers contracting with IPA, but in 2008 it was amended to cover ARES as well. After much political haggling and deal-making, those 2008 amendments also worked out a system of compliance rules … which have turned out to be an unholy mess.

In all cases, complying with an RPS means coughing up money to be used buying renewable energy. But there are different ways of coughing up money and different ways the money can be used. Illinois decided, in its wisdom, to try a little bit of all of them.

The best way to think of this is to imagine the Illinois RPS compliance money going into three buckets. One bucket is filled by the power producers contracting with IPA, the other two are filled by ARES.

Bucket one: Power producers contracting with utilities through IPA send their compliance money into a common fund administered by IPA. That fund is used to purchase a mix of short-term RECs and 20-year PPAs.

Bucket two: Up to half of the compliance money from an ARES can be used to buy renewable energy, mainly through RECs.

Bucket three: The other half (or more) of the compliance money from an ARES comes in the form of Alternate Compliance Payments, which go into the Renewable Energy Resources Fund, another, separate fund also administered by IPA.

A few things to note about this Rube Goldberg monstrosity of a system.

First, notice that the money for RPS compliance is split up and spread all over the place.

Second, notice that most of the money, rather than going to long-term PPAs with new Illinois renewable energy projects, goes to short-term RECs, mostly via out-of-state power producers. It’s doing very little to create stable demand for new renewable energy, which one would think is the point of an RPS.

Third, note that the Renewable Energy Resources Fund, which might have served to attract large-scale investment in renewables, was raided by the governor and the legislature the very first year it existed. The minute there was a pool of money, state leaders swooped in and stole it to pay down other parts of the state’s beleaguered budget. Ever since then, the money that’s gone into the fund has just sat there, unused. After all, if you were a renewable energy company, would you make a large, long-term investment on the promise of money that might get stolen by politicians at any moment? No.

Fourth, notice that this leaves bucket one as the only sizable remaining pool of stable money — the only source that might attract new clean energy projects to the state.

But remember the poor IPA? Its commercial and industrial customers bailed. Then municipal aggregation took off and its residential customers started bailing. If all the municipal aggregation measures on the ballot this year pass, IPA will be left representing about 10 percent of the state’s energy load.

As IPA’s customer base shrinks, its need to procure power shrinks. In fact, it has announced that it does not plan any more renewable energy procurements until 2018 (at the earliest!). And it gets worse. Because IPA’s coverage is shrinking, its RPS compliance funds are also shrinking. So little is coming in that IPA may not be able to cover existing renewables contracts.

So this is where our long, looong story takes us: Municipal aggregation is shrinking the IPA consumer base, and as the IPA consumer base shrinks, the only money available in the state for long-term renewables contracts shrinks. At this rate, the RPS will stimulate virtually no more renewable energy development in Illinois. It will just send a stream of revenue out of state via RECs. It looks like municipal aggregation is going to take a rickety, poorly designed RPS and shake it to pieces.

How to save municipal aggregation and the RPS

This is not to say that municipal aggregation will have no positive effects. As time passes and municipal governments learn what works and what doesn’t, it may well be that some of them will get more ambitious. Polls do show that the people of Illinois, in both parties, are squarely in favor of moving to clean energy. Instead of just buying RECs, some of them may set aside money to buy actual renewable energy capacity — rooftop solar panels and so on. They may get aggressive on energy efficiency to keep costs down. Theoretically, municipalities could go well beyond the RPS. This is distributed experimentation. It’s local control. It’s energy democracy — and y’all know I love me some energy democracy.

However, it would suck if it helped kill an ambitious RPS in an important energy state like Illinois.

So what’s the answer? Fix the RPS!

How to fix it? Well, remember the main problem: The money is getting split up, disaggregated, and thus having much less impact than it could. The solution, then, is to scrap the dippy three-bucket system and put all the RPS compliance money into one big bucket, where it can be used to establish long-term power contracts with clean-energy developers that promise to come to Illinois. More renewable energy in the state, more jobs, more local money staying in local economies. Woo.

As it turns out, there’s a dead simple way to accomplish that. Right now, RPS compliance payments are charged on the generation side, which, as we saw, is all kinds of fragmented. Instead, they could be charged on the distribution side, where, you’ll remember, all customers are served by the same two big utilities. There would be an RPS compliance charge on the power bill of every single utility customer, with the money channeled into a single, common fund. This wouldn’t cost ratepayers any more than they already pay. It would merely move the cost from one place to another. (New charges on utility bills are obviously a political hot potato, but it’s worth noting that this is exactly how the state’s Energy Efficiency Standard has worked since 2007, and there have been no consumer complaints. And recall that German electricity customers pay a charge like this without complaint, because they see the benefits.)

This simple change would create a large, stable pool of money that could spur real progress on in-state renewable energy. Best of all, it would allow municipal aggregation to go forward without any perverse consequences. Communities could get absolutely as creative as they wanted in finding their ideal mix of power sources (and efficiency). They could experiment like crazy. The RPS money would be safe, serving as a baseline for local efforts.

Why doesn’t the Illinois legislature just do this? From what I’ve heard, the need for the fix is widely understood and it would probably pass if it came to a vote. Problem is, the measure is virulently opposed by Exelon, which would just as soon let the RPS die a slow death, since the addition of cheap wind energy to the Illinois grid is messing with its profits. (That’s also why it’s lobbying against the extension of the wind production tax credit.) Exelon is the 800-pound gorilla in Illinois. Its ComEd PAC gave $108,000 to candidates (of both parties) in the fourth quarter of 2011 — more than any other PAC. A great many Illinois politicians are beholden to it.

One of them is Speaker of the House Michael Madigan (D), without whose cooperation no bill can go to the floor of the Illinois legislature for a vote. So … that’s a little sticky. But it’s not an insurmountable problem, by any means. It will just take some political muscle. (Happily, Illinois finally boasts a small but growing clean-energy PAC.)

In my always humble opinion, this fight is what greens in Chicago and the rest of Illinois should be rallying around. Yes, the municipal aggregation ballot measures are great, but most of them, including Chicago’s, are expected to pass. It’s the RPS that needs the concerted attention of an engaged grassroots movement.

If the RPS is fixed and municipal aggregation spreads across the state, Illinois will be a damn interesting place for renewables — a hotbed of experimentation and innovation. Here’s hoping they can pull it off.